Statutory Demands and Director Penalty Notices
A statutory demand is a formalised, written demand for payment served by a creditor on a debtor company. Failure by the company to discharge its debts posits a presumption of insolvency, being the inability for a company to pay its debts as and when they become due and payable. It is important to remember that temporary lack of liquidity does not constitute insolvency. Therefore, if a company fails to discharge its debt within 21 days of a statutory demand they are presumed to be insolvent.
Once a company is deemed to be insolvent, a third party may apply to commence the winding up of the company. At this point there must be no other remedy available to the applicant. The following parties can apply to the court for an order to wind up an insolvent company:
- The company;
- A creditor (secured or unsecured);
- A contributory;
- A director;
- A liquidator or provisional liquidator of the company;
- ASIC; or
- A prescribed agency.
The parties aforementioned will have grounds to apply for a company's winding up upon the company's failure to pay a statutory demand. As such, standing for an application to wind up a company is contingent on the company being deemed insolvent in this case.
Director Penalty Notices ('DPN')
The Commissioner of Taxation governed by the Tax Laws Amendment Transfer of Provision) Act 2010 (Cth) ('the Act') may issue a notice for a director to pay the company’s tax liability. The director has 21 days in which to do so after service. The Commissioner of Taxation cannot commence proceedings before the expiration of this period.
The Act places a positive obligation on directors to pay the company's taxes. Subsequently, directors have a duty to ensure that the company either:
- meets its obligation (to pay withheld amounts to the Commissioner of Taxation); or
- goes promptly into voluntary administration under the Corporations Act 2001 (Cth) or into liquidation.
To ensure this duty is followed, the Act enforces a penalty for non-compliance. A director may rely on the defence that all reasonable steps were taken to ensure compliance. However a director can no longer be relieved of a potential DPN liability by entering into a s222ALA 'agreement' under the Income Tax Assessment Act 1936 with the Commissioner of Taxation.
If the director does not promptly place the company into voluntary administration the following parties may appoint an administrator:
- The company;
- A liquidator; or
- A chargee.
Voluntary administration allows the company to reach an arrangement with its creditors to save the business. This mechanism allows the company the opportunity to continue trading. However, if it is not possible for the company to continue in existence, voluntary administration will usually result in a better return for company creditors than immediately winding up the company.
Alternatively a statutory derivative action may be brought by third parties. In ASIC v Healey it was held that a director’s skill set must encompass interpreting company accounts. As such, a director receiving notice from the Commissioner of Taxation was indicia of a failure to exercise skill and care with respect to company accounts. Additionally, if the director neglected to pay company taxes after receipt of notice, this may constitute a breach of the director’s duty to act in the best interests of the company. Actualisation of these events would result in the following parties having an action against directors of a company:
- A member or former member or a person entitled to register with the company;
- An officer or former officer of the company' or
- A person acting with leave granted under s237 of the Corporations Act 2001.
The granting of leave would result in an action brought against the director by the company in relation to the director's decisions surrounding the DPN.
Third party claims may arise in circumstances where a company is insolvent or near insolvency. In relation to a statutory demand, third party claimants may apply for the winding up of the company. Alternatively, with respect to a director penalty notice, an authorised third party may appoint an administrator or commence a statutory derivative action. Therefore it follows that an insolvent or near insolvent company may be subject to statutory demands, director penalty notices and various third party claims.
If you would like further information in relation to Director Penalty Notices or have a specific query about this topic, our consultants can provide professional advice in relation to your circumstances.
"For more information and advice about this topic, please call our office to speak with one of our experts in this area".
By Shanan John Ramsden Lawyer and Managing Partner of Ramsden Lawyers.
4 Apr 2012